Mad Hedge Technology Letter
September 14, 2020
Fiat Lux
Featured Trade:
(THOUGHTS ON THE FUTURE OF U.S. TECH)
(AMZN), (GOOGL), (FB), (AAPL)
Tag Archive for: (GOOGL)
The world, technology, and U.S. economy are rapidly approaching a paradigm shift and investors will need to keep their finger on the pulse to adjust and adapt to the new normal.
This tech letter is about a recent note from Deutsche Bank that landed in my inbox and the contents are so pertinent that I must address it and what it means for the U.S. tech sector.
The note essentially said that the “era of globalization” is over and hunker down for the “age of disorder” where millennials are disenfranchised, poor, and largely disconnected from the financial benefits mostly harvested by the boomer generation.
The coronavirus has woken up the sleeping giant of Americas’ youth - they have come to grips that even though they use the flashy apps of Facebook (FB), Google (GOOGL), Amazon (AMZN) on their shiny Apple (AAPL) iPhone, they don’t exactly build wealth from these companies.
In fact, it’s the other way around.
According to Deutsche Bank, the next step in the development of the U.S. tech sphere is taking “revenge and redistributing wealth” from the old to the young.
The bottoming of tech stocks in March and the explosive price action have mainly benefited the shareholders who are from an older cohort and then the hardest hit was the youngest.
As Millennials start to grow in to positions of power, inheriting Apple or Amazon stock will most likely become costlier because the inheritance tax could balloon.
Boomers who mostly hold Congress seats have also stonewalled regulation on tech.
Tech, in fact, has the least amount of regulation out of any industry in the U.S. and nothing has been done to stop them from building up ironclad monopolies.
This could culminate in not only a tech tax on realized gains, but REAL regulation that won’t happen until political power is shifted over to the Millennials.
Climate change has been wreaking havoc in the Western region of the United States, but Deutsche Bank says that an even greater risk is the “intergenerational conflicts” that are about to explode.
The truth is that many young people feel alienated and stifled by the status quo as if the “establishment” is the only group in the U.S. that has benefited.
According to Deutsche Bank, Millennials also feel that the government is only working for corporations and the “elite.”
This data also doesn’t necessarily pinpoint one racial or ethnic group in the Millennial category but is a broad analysis that cuts across all shades of the spectrum.
As of July 2020, 52% of millennials were living in their parents’ home, up from 47% in February, according to the Pew analysis of Census Bureau data.
Young people simply cannot afford to live independently now.
If this power pivot does take place, corporate taxes will meaningfully go up, irrespective of what Biden does if he gets elected, and that is terrible news for the likes of Facebook, Google, Amazon, Apple, Microsoft, and so on.
These “redistributive policies” will be seen as a desperate act of saving Millennial’s financial lives as the increasing debt load will exacerbate inflation, meaning it will be more expensive each day to be an American wielding a weakening dollar.
The group of 7 big cap tech stocks will have to adjust to these new conditions, and clearly the riskiest company is Facebook who has been overstepping data privacy laws and destroying democracy for years.
These issues will finally be addressed when Millennials age into power.
Millennials are sure to take a hatchet to Boomers' pension benefits as the debt built up will need to be repaid and cuts along the financial chain must be accepted to the detriment of Boomers' inheritance plans.
It appears as if making money hand over fist, that mostly the Boomers enjoyed, will certainly be tested moving forward.
As the world quickly deglobalizes, tech companies won’t be able to outsource semi chips to Taiwan and assemble devices in China on the cheap.
These strategies must move inward and locally to support American jobs.
The inquest is out, and unfettered globalization and capitalism have been handed a guilty verdict by the Millennial generation.
The deeper ramification is that unfettered asset appreciation will likely be a relic of the past.
If you look at these tech charts, they basically appreciate in a straight line. Get ready for more zig-zags, and if regulation hits hard, we could also be facing zeroes in certain strategic tech firms.
Honestly, a company like Facebook doesn’t produce anything and is overvalued for it.
Then there is the issue of whether Millennials are content on the ever-growing problem of financing zombie companies that now comprise 37% of the S&P because of artificially low-interest rates.
Fed Governors like Jerome Powell will soon become obsolete and blamed in the history books for recklessness.
I define zombie companies as companies that cannot even pay back interest on debt let alone principal payments.
These companies are a serious drag on innovation because they perpetually fund companies that should not exist adding to the debt load.
The artificially low rates have boosted tech shares and broader markets for years along with the Trump corporate tax cut.
Buybacks will eventually become illegal because of the conflict of interests.
Just take a look at the big airlines whose management milked the cash cow and left the rainy-day fund barren to only get bailed out billions of dollars.
That won’t happen again.
Corporate funding will get significantly harder in the next year of corporate America. Investors should take note that management is rushing to capital markets to get every last penny of funding before the election because terms of financing could sour quickly in November.
US and China geopolitical relations will worsen and we are already seeing it play out as China has notified the U.S. that they would prefer TikTok to be deleted instead of generating a sale.
All Chinese tech apps will be removed, and Chinese tech companies won’t be allowed to list on U.S. public exchanges.
Don’t expect anymore “Chinese investment” into Silicon Valley for the foreseeable future, and that goes for education where the Chinese Communist Party has bought off Harvard University for a $1 billion.
U.S. Millennials now must compete with the Chinese government who are glad to fund their zombie companies in a race to the bottom.
This doesn’t exactly scream a higher-quality life for future Millennials exacerbating the problem.
Climate change is on the verge of compounding from bad to worse as California is grappling with not only apocalyptic air quality but a pandemic.
Who knows the next time anyone will be able to go outside in California?
Do you think rolling blackouts will encourage tech start-ups to continue operations in California?
Computers and internet don’t function without electricity – someone should tell California Governor Gavin Newsom.
Tech startups will never happen in California again, likely catalyzing a renaissance in zero state income states with cheap property markets.
Ultimately, we are currently in the midst of a technology revolution with astonishing equity valuations reflecting expectations for serious disruption to the status quo.
Call it a bubble or whatever you want, but the fragility of this bubble is real and we only need one external event for a major correction.
Then there is the thorny issue of whether markets will flip out over negative interest rates if that actually happens.
The report goes on to say that there is a “bipolar standoff as both the US and China seek to prevent encirclement by the other. Companies that have embraced globalization will be stuck in the middle if relations sour as we fear.”
It’s clear to the naked eye that the prior strategy of “scaling” a tech company like Facebook and Apple just won’t work anymore because so many territories will be off-limits.
Creating the next unicorn will be that much harder as many of the tailwinds boosting tech the last 25 years are on the verge of winding down.
As we enter this transition stage, I expect one of the big tech companies to falter through regulation or some other black swan event.
These developments favor active tech stock managers who must recalibrate daily according to wild swings that we will experience.
Buckle up because this will be a wild ride.
Global Market Comments
September 8, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHY CASH IS STILL TRASH),
(JPM), (AAPL), (AMZN), (V), (TLT), (SPY), (GOOGL),
(BAC), (C), (FCX), (VIX), (VXX), (TSLA), (FB)
(JPM), (AAPL), (AMZN), (V), (TLT), (SPY), (GOOGL),
(BAC), (C), (FCX), (VIX), (VXX), (TSLA), (FB)
This isn’t the “Big One.”
This isn’t even a Middle One.”
This is no more than a 10%-15% correction typical for long term bull markets.
Sure, we saw every technical indicator known to man scream “SELL” in the run-up to the recent market top. There were other factors at play as well.
The bulk of the buying focused on only the top six stocks, more concentrated than seen during the Dotcom Bubble Top in 2000.
There really was only one buyer. That would be my friend Masayoshi Son’s Softbank (SFTBY). He bought $4 billion worth of big tech call options in the run-up to the top with an exercise value of $30 billion. When he started to sell last Monday, the market for these options vaporized and stocks plunged.
The fact that both Apple (AAPL) and Tesla (TSLA) shares split the same day also defined a market top that I have been warning readers about for weeks.
This is all in the face of the incredible reality that 50% of all S&P 500 (SPY) stocks are down over the past two years. It really has been a stock picker’s market with a turbocharger.
And this isn’t just any old bull market. We are in fact 11 ½ years into a bull market that started in March 2009 that has another decade to run. We have completed the first 400% gain. What lies ahead of us is another stock market increase of 400%, taking us up to 120,000 in the Dow Average by 2030.
And this is a bull market that has suffered plenty of 10%-15% corrections since its inception. The one that began in Thursday is no different. The sole exception to this analysis was the COVID-19-induced 37% meltdown that began in February. That little event only lasted six weeks.
For you see, the fundamentals have not changed one iota. No, I’m not talking about earnings, valuations, or sales growth. That is so 20th century.
No, I’m referring to the only fundamental that counts in the 21st century: Liquidity.
And liquidity isn’t shrinking, it is in fact increasing. That includes the unprecedented expansion of quantitative easing by the Federal Reserve, massive deficit spending by the US government, and zero interest rates, which Fed governor Jay Powell has promised us will continue for another five years.
During the last Dotcom Bubble top, the FAANGs and Tesla (TSLA) did not even exist. Apple was just coming out of its flirtation with bankruptcy and Amazon (AMZN) had just barely gone public. Google (GOOGL) and Facebook (FB) were still but glimmers in their founders’ eyes.
Except now we have a new bullish fundamental to discount: a Biden win in November. Since Biden decisively pulled ahead in the polls in May, the stock market has risen almost every day. He is 4%-10% ahead in every battleground state poll.
Even if Trump were to win every red and red-leaning state accounting for 163 electoral college votes, plus all 63 votes from toss-up states (AZ, NC, IA, FL, GA, OH), he would still lose the election, where 270 votes are needed to win. Just THAT is a 1:100 event, on the scale of Harry Truman’s historic 1948 compact, and Trump is no Harry Truman.
So what of Biden wins?
You can count on the $3 trillion stimulus bill passed by the House in March to go through, which primarily allocates money to keep states and local municipalities from firing policemen, firemen, and teachers.
Next to come are another $3 trillion in infrastructure spending. And I absolutely know from past experience that markets love this kind of stuff. It enhanced liquidity even more.
As I say, cash is still trash, and it may remain so for years.
The Top is in, with a horrific two-day 1,500-point selloff in the Dow Average ($INDU) coming out of the blue on no news and signaling the end of the current rally. Whatever went up the most is now going down the most as the Robinhood traders flee in panic. This was long overdue. Margin calls are running rampant.
Volatility (VIX) soared to $38, up 70% in two days, meaning that we may be close to the end of this correction. The (SPX) is down 24 points, 6.7% from the Wednesday high. The last (VIX) peak was at $44 in June and $80 in March. Time to start buying stocks for a yearend rally? Look at the banks.
Was Apple (AAPL) really up 400%? Did Tesla gain 500%? You might be fooled if you didn’t know that these stocks just split, Apple at 4:1 and Tesla for 5:1. In fact, both stocks posted robust gains in real terms, Apple up 5% and Tesla up 10%. Tesla just hit my five-year split-adjusted target of $2,500. Every other analyst had a much lower target or were bearish. Time to run a mile as splits often herald intermediate market tops.
Apple hit a $2.3 trillion in market cap at the peak, up a staggering $300 billion in days. We are truly in La La Land here. The price-earnings multiple has soared from 9X to 40X. That 5G iPhone better deliver. Didn’t you hear that 5G was causing Coronavirus, a popular internet conspiracy theory?
The Dow Average just lost its Apple turbocharger. Some 1,000 of the 2,000 points the Dow Average gained in August were due to Apple alone. With the Dow rebalancing today, with (XOM), (PFE), and (RTX) out and (CRM), (AMGN), and (HON) in, Apple’s influence has been greatly diluted. With the (VIX) back up above $26, the worst is yet to come. The stock market is screaming for a correction.
Copper (FCX) hit a new 3-year high, with demand soaring in China. They were the first to cap Covid-19 and restore their economy. The red metal is a great call on the recovery of the global economy. Those who bought the Freeport McMoRan (FCX) LEAPS I recommended in March are sitting pretty. The shares are up 228% since then.
Tesla to sell $5 billion in stock to finance the construction of new factories in Nevada, TX, and Germany. (TSLA) fell 5% on the news. I had been advising clients to sell all week. It won’t be a conventional secondary stock offering but an effort to sell into every stock spike. More proof that Elon hates Wall Street as if we needed more. With a market cap of $450 billion, investors are finally viewing Tesla as a data company rather than a car company.
US car sales recover to 15.2 million in August on an annualized basis. That brings us almost back to pre-pandemic levels. This is the best indicator yet that the US is returning to a semi-normal economy. Of course, zero interest rates and other unprecedented incentives are a big help.
Consumer Spending popped, up 1.9% in July, which accounts for two-thirds of the US economy. Those who have money are spending like there’s no tomorrow, and with a global pandemic, maybe there won’t be. New car purchases were a big winner as buyers take advantage of 0% financing everywhere.
Weekly Jobless Claims dropped to 880,000, still terrible, but less terrible than last week. California claims have topped 8 million since the pandemic began. Continuing claims drop to 13.3 million, down from the 25 million peak in May.
US Unemployment Rate plunged to 8.4% in August, from 10.2%. The August Nonfarm Payroll report jumps by 1.37 million. It’s a much faster improvement than expected. Retail gained 248,000, Education & Health Services were up 147,000, and Leisure & Hospitality were up 174,000, Government was up 344,000. It’s all thanks to the miracle of government spending. The Dow Average is down 500 points anyway.
China to dump US Treasury bonds in response to Trump's escalating trade war, putting $200 billion in paper up for sale. They hold $1.07 trillion in total and is our largest single creditor. The (TLT) is down two points on the news, where I am running a double short position. Who is going to fund America’s massive borrowing?
When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.
My Global Trading Dispatch bounced back hard with some super aggressive buying of stocks right at the Thursday and Friday market bottoms and selling short of bonds at the top.
By going full speed ahead, damn the torpedoes, I brought in the best two-day return in the 13-year history of the Mad Hedge Fund Trader, up a heroic 8.27%.
It started out as a terrible week, getting flushed out of one of my short positions in the (SPY) for a big loss as the market hit a new all-time high.
Then I got long banks (JPM), Apple (AAPL), Amazon (AMZN), Visa (V), and went triple short bonds (TLT). I still retain one short in the (SPY), which is now profitable. I would have bought Bank of America (BAC) and Citigroup (C), but the market ran away before I could write the trade alerts.
The instant crash was yet another gift. Right after I shorted bonds, the Chinese hinted that they would unload $200 million worth of their US Treasury bond holdings. The harder I work, the luckier I get.
If these positions expire at max profit in eight trading days, I will be back at new all-time highs. Notice that I am shifting my longs away from tech and toward domestic recovery plays.
You only need 50 years of practice to know when to bet the ranch.
That takes our 2020 year to date back up to 30.99%, versus -0.70% for the Dow Average. September stands at 4.44%. That takes my eleven-year average annualized performance back to 36.27%. My 11-year total return returned to 386.90%. My trailing one-year return popped back up to 51.60%.
It is a quiet week as always following the fireworks of the jobs data.
The only numbers that really count for the market are the number of US Coronavirus cases and deaths, which you can find here.
On Monday, September 7, it is Labor Day in the US, and markets are closed.
On Tuesday, September 8 at 10:00 AM EST, the Economic Optimism Index for September is released.
On Wednesday, September 9, at 8:13 AM EST, the EIA Cushing Crude Oil Stocks are out.
On Thursday, September 10 at 8:30 AM EST, the Weekly Jobless Claims are announced. US Core Producer’s Price Index for August is also out.
On Friday, September 4, at 8:30 AM EST, the US Inflation Rate for August is printed. At 2:00 PM The Bakers Hughes Rig Count is released.
As for me, I am headed back to Lake Tahoe to flee the horrific smoke in the San Francisco Bay Area drifting our way from the rampant California wildfires. If people don’t believe in global warming, they should come here where we have it in spades. We’ll even give you some.
At least we’ve been getting spectacular sunsets.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
August 31, 2020
Fiat Lux
Featured Trade:
(WALMART’S QUEST TO BECOME THE NEXT AMAZON)
(WMT), (MSFT), (ORCL), (GOOGL), (AMZN)
U.S. tech is about to hit a 10-bagger when TikTok is set to choose between the Microsoft (MSFT)-Walmart hybrid offer or one from Oracle (ORCL) in the next 48 hours.
The network effect that will result from this purchase will be staggering and still underhyped in the mainstream media.
I am on record saying that Walmart is the new Fang, and their ambitions prove it.
Walmart (WMT) wanted to be the majority owner of TikTok, but the U.S. government wanted a technology company to be the lead investor.
I am not sure how that makes sense in an age where every company is a tech company.
Walmart was originally in a consortium with Google (GOOGL) before moving over in recent days to partner with Microsoft (MSFT) when it became clear the retailer would not be able to lead the deal.
Walmart is validating my thesis that it is a hybrid ecommerce company with its last earnings report 2 weeks ago.
In the company’s Q2 earnings, Walmart reported its U.S. ecommerce sales were up 97% — an increase attributed to more customers shopping online during the pandemic, stocking up on household supplies and shopping for grocery items online.
The TikTok deal first started with Walmart negotiating with SoftBank Chief Operating Officer Marcelo Claure.
SoftBank’s Claure believed Walmart’s all-American image and Google’s cloud computing infrastructure backbone could be a way in for the Japanese technology company.
The deal structure would have had Walmart as the lead buyer, with SoftBank and Alphabet acquiring minority stakes. One or two other minority holders held talks to join too but this ultimately was nixed by the U.S. government.
Walmart’s goal is to become the exclusive e-commerce and payments provider for TikTok and have access to user data to enhance those capabilities.
U.S. national security hawks need to save face by having a thoroughbred U.S. tech company lead the deal to show that this isn’t just about underhanded economic mercantilism.
Google could face significant antitrust opposition if it acquired TikTok’s U.S. assets.
Amazon is out of the picture too for anti-trust worries.
These concerns caused the consortium to crumble last week and led Walmart, which had become increasingly convinced that TikTok fits into its strategy, to partner with Microsoft on a bid instead.
TikTok is pondering which way to go – either the Microsoft-Walmart bid or a rival offer from Oracle. A deal, which is set to value TikTok’s U.S. operations in the $20 billion to $30 billion range, could be completed in the next 48 hours.
What does this mean for Walmart?
Walmart is hellbent on directly competing with Amazon prime for that same ecommerce market.
Walmart ecommerce sales now total more than $10 billion in quarterly U.S. ecommerce sales, exceeding 11.4% of the retail giant’s overall U.S. net sales for the first time.
The achievement reflects the ongoing shift toward online shopping amid the pandemic, and the increasingly fuzzy line between online and physical retail sales. It is also an example of the pandemic accelerating the shift to digital commerce at traditional brick-and-mortar retailers.
The timing isn’t a coincidence with Walmart on the verge of rolling out its own Amazon Prime service dubbed Walmart+.
Walmart’s new membership program is expected to cost $98/year, competing with Amazon’s $119/year Prime membership.
Amazon’s global online sales are 4.5X larger than Walmart’s at $45.9 billion for the quarter, up nearly 50%, and its physical retail sales were $3.8 billion, down 13% from the same period a year ago.
Walmart has significant headway to make before it comes close to Amazon Prime but there are fertile pastures in front of them, meaning I believe Walmart is a conviction buy at these levels.
At the bare minimum, this is a conspicuous sign of intent for Walmart that has successfully turned around the titanic and is a real time player in ecommerce.
They will be on the prowl for other tech purchases in the future as well as they certainly have the cash flow to pull the trigger on adding more tech talent to the lineup.
If Walmart reels in TikTok, I recommend long-term investors to buy Walmart as a tech growth asset and it is easily a $200 stock.
Mad Hedge Technology Letter
August 26, 2020
Fiat Lux
Featured Trade:
(THE EMPTY PIPELINE OF TECH INNOVATION)
(AAPL), (FB), (AMZN), (GOOGL), (NFLX), (TSLA), (SNAP), (MSFT), (ORCL), (TWTR)
The oligarchical regime of Northern Californian tech companies stopped innovating because they don’t have to.
When you have a monopoly – you have one objective – to crush anything that remotely resembles competition.
That has been happening for years now by the Silicon Valley oligarchs and the government still hasn’t taken their finger out to do much about it.
Honestly, my bet is that most of U.S. Congress own stock portfolios and these portfolios are spearheaded by the likes of Apple (AAPL), Facebook (FB), Amazon (AMZN), Google (GOOGL), Netflix (NFLX), and possibly even Tesla (TSLA), if they want a little growth.
It’s a direct conflict of interest, but that's not surprising for politics in 2020, is it?
The government likes to jawbone to the public saying they will make competition a level playing field, but actions show they are doing the opposite.
The Silicon Valley oligarchs are whispering in the ear of Congress and they listen.
Who would want Congress to lose money in their retirement portfolios, right?
Well, what now?
Fast forward to the future - mid-September, TikTok — the Chinese-owned, video-sharing phenomenon — MUST sell its U.S. operations.
Given the app’s 100 million U.S. users, this forced divestment by President Trump has triggered a delirious auction now pitting tech giants Microsoft (MSFT), Oracle (ORCL), and Twitter (TWTR) against one another.
The White House and Big Tech are boiling the free for all down to a combined story of national security and opportunistic capitalism amid unfortunate geopolitical tension between the U.S. and China.
But the ultimatum to ByteDance, TikTok’s owner, is more accurately understood as a dark window into Silicon Valley’s utter failure to innovate, and a warning signal of its transformation into a mere protector of long-established turf.
Silicon Valley has long adhered to the motto, “Move fast and break things” – but that was long ago when Steve Jobs was busy making the first iPhone.
The truth is Silicon Valley couldn’t be more corporate than it is now, and they use the corporate machine to serve the ends they desire.
Big Tech is just in love with buybacks like the rest of corporate America and the only reason they avoid it now is to appear as if they are in tune with public discourse and not tone deaf.
Huawei, another punching bag of the Trump administration’s tech war with China, best foreshadowed the optics.
In remarks to reporters in March 2019, Chinese politician Guo Ping said, “The U.S. government has a loser’s attitude. They want to smear Huawei because they can’t compete with us.”
ByteDance produced the hottest new social media platform on a global scale, and Facebook, in typical fashion, responded by brazenly copying TikTok, adding a feature called Reels to Instagram.
Don’t forget that Mark Zuckerberg has been attempting to destroy Snapchat (SNAP) for years after CEO Evan Spiegel refused to sell it to Zuckerberg.
The rest of the tech ecosphere has turned a blind eye to the anti-trust violations because they don’t want to be the next takeout target.
Make no bones about it, Silicon Valley, with the help of the Trump administration, is about to do a smash and grab job on China’s best tech growth asset.
This cunning maneuver alone has the knock-on effect of not only extending the tech rally in U.S. public markets but increasing the scarcity value and emboldening the Silicon Valley oligarchs.
I’m all about good deals and robbing Chinese tech in broad daylight is overwhelmingly bullish for the U.S. tech sector.
Imagine adding another Instagram to the appendage of an already mammoth tech company.
So why innovate? Why deploy capital into research and development when you can just nick a foreign company's crown jewel?
Even if you hate Silicon Valley at a personal level, it is literally impossible to short them, and now they are resorting to stealing companies, what other passes will government, society, and corporate America give American tech?
In either case, it’s not for me to judge, and as a technology analyst - I am bullish U.S. tech.
Mad Hedge Technology Letter
August 17, 2020
Fiat Lux
Featured Trade:
(U.S. STYMIES THE ADVANCEMENT OF FOREIGN BAD ACTORS)
(BABA), (AAPL), (IQ), (NFLX), (FB), (GOOGL), (AMZN)
Stay away from Chinese tech companies listed on the U.S. exchanges. I wouldn’t touch them with a 10-foot pole.
Not only are these firms unscrupulous, but the U.S. administration is specifically attacking them as a cornerstone campaign strategy as we close in on the November election.
The blitzkrieg has been increasing at a rapid clip with U.S. President Donald Trump banning social media asset TikTok and chat app WeChat.
Just in the last few hours, the U.S. administration has said they are also “looking at” going after Chinese eCommerce firm Alibaba (BABA) who is the Chinese Amazon.
If the trends continue, there could be no Chinese tech companies freely extracting American revenue by this November.
Things will only get worse.
No doubt the coronavirus fiasco has exacerbated tensions between the countries with both sides dealing with a plunging economy.
The only reason we do not hear about the depths of despair going on in the Chinese economy is because the media is suppressed there.
Chinese media is tightly controlled disabling any negative news that shines an unfavorable light on the Chinese communist party.
Then there is the immoral fraud aspect of Chinese tech companies as every mainland Chinese firm wishes to go public in New York because company financials are never audited, and they are immune from any criminal liability.
This is a recipe to enable reckless Chinese management who state opaque numbers in their financials in the hope that American investors will take the bait.
Another cheater has been unearthed by Wolfpack Research who along with Muddy Waters have made it their mission to root out the bad actors.
The supposed “Netflix (NFLX) of China” Chinese streaming service iQiyi (IQ) plunged in after-hours trade in the U.S. after it announced the Securities and Exchange Commission (SEC) has launched a probe into the company.
The case revolves around iQiyi falsifying their subscription numbers which everyone knows is the key to exhibiting growth in the company.
iQiyi said the SEC is “seeking the production of certain financial and operating records dating from January 1, 2018, as well as documents related to certain acquisitions and investments that were identified in a report issued by short-seller firm Wolfpack Research in April 2020.”
Wolfpack Research has accused iQiyi of inflating 2019 revenue by around 44%.
Wolfpack also said iQiyi artificially overexaggerated expenses among other data.
The SEC probe into iQiyi comes amid rising scrutiny on U.S.-listed Chinese companies following the Luckin Coffee debacle in which they committed the same act of falsifying numbers.
This copycat crime is clearly seen as a big winner in Mainland China encouraging a slew of companies to decide on the same strategy.
The Coffee company admitted to fabricating sales numbers for 2019. The company was subsequently delisted from the Nasdaq in June.
China and its tech firms are one of the few bipartisan issues with strong support from both sides of the aisle and I can only see the temperature in the kitchen getting hotter.
The side effect of purging the Chinese tech out of the U.S. is that it bolsters the investor case for American tech.
Not that they needed help in the first place.
If the government won’t allow foreign companies to compete with Silicon Valley, then the monopolies built by the likes of Apple (AAPL), Facebook (FB), Google (GOOGL), and Amazon (AMZN) will feel protected because of the government effectively widening their moats.
One might argue that the crimes these American companies have committed are just as bad as the Chinese firms, but they get a free pass for being American.
Remember this is the age of de-globalization with national governments protecting national companies and not the other way around.
Silicon Valley companies have tried to pervert the U.S. employment situation by maneuvering around U.S. nationals by applying for the foreign HB-1 visas in droves and underpaying mostly Chinese and Indian nationals to work for the likes of Google and Facebook.
We can’t say these Silicon Valley companies are saints. They certainly are not, but that doesn’t matter in today’s climate when government, billionaires, and tech moguls are assumed as scum from the get-go.
Then there is the personal data issue that can’t be said to be much better than what the Chinese companies are doing.
The double standard is not surprising, and a heavy dose of politics has been injected into the global tech ecosphere to the detriment of cross border trade.
In the fog of war, this is why I have largely focused on U.S. software companies with subscription revenue because it offers more visibility than an unstable revenue model like Uber or Lyft.
In any case, nobody can blame the U.S. government for going this route since, after all, Facebook, Google, Amazon, and Netflix are all banned in China as well.
You don’t see U.S. tech companies trading on the Shenzhen tech index for a reason and after this monster run-up from the March nadir, it’s obvious why Chinese tech firms want to keep that funnel to U.S. investor capital clear.
This series of events that effectively coddles American big tech will insulate them from any real share weakness. The trend is your friend and I am bullish on American big tech.
